Peru’s Mid-Tier and Junior Companies

In 2009, Peru overtook the U.S. in exploration expenditure to rank as the third largest destination for prospectors. The country’s stability has fostered a number of success stories as juniors have become producers, mainly in gold and silver.

The panorama for exploration has changed dramatically for the better over the past few years. Not that long ago, venturing into some areas in the Andes was a dangerous activity. Miguel Cardozo, president, Association of Explorers of Peru (AEPE) and former head of the Newmont team that discovered Yanacocha, recalls how it was to work in the 1980s. “We were exploring when no one wanted to do business in Peru,” Cardozo said. “These were times of very high inflation, bad governments, terrorism…during many of these years Newmont was the only foreign mining company exploring in Peru. The reward for that good decision was Yanacocha.”

Today, the map of mining concessions is obviously more crowded than back then, but the country still offers very interesting opportunities. Some companies that started from scratch in Peru have grown to become medium-sized companies with producing assets. A case in point is Minera IRL, established a few years ago as a small junior and which has generated about $100 million in gold sales since it put its Corihuarmi mine into operation in mid-2008.

Today, Minera IRL is listed in Lima and on the TSX as well as in London and has a development pipeline which includes Ollachea, its largest project in Peru, and Don Nicolás in the Argentinean Patagonia, following the company’s acquisition of Hidefield Gold in late 2009. The company’s exploration budget was $10 million in 2010.

“We can see Corihuarmi running until late 2014/early 2015. We have generated more ore, we have got an extra 55,000 oz gold and we are expanding our throughput, which will allow us to maintain our annual production of 30,000 oz gold,” said Courtney Chamberlain, executive chairman and CEO, Minera IRL.

With regard to Ollachea, currently in pre-feasibility, it is a bigger project than Corihuarmi, Chamberlain said. “The scoping study contemplates a production of roughly 117,000 oz/y gold for nine years. We have 1.3 million oz in inferred resource. It is a company maker, it is the jewel of our crown. We expect to have pre-feasibility completed in March-April 2011, and to be in production by 2014. Before that, in 2012, we expect to have Don Nicolás in Argentina with 60,000 oz gold annually.”

Similarly, about to join the ranks of Peru’s gold producers is Rio Alto Mining, developers of the La Arena project. The deposit will be exploited in two phases; the first one is the extraction of 634,000 oz of gold during a seven-year period starting in 2011; the second one, expected for 2015, will see the exploitation of the sulphides, containing gold, copper and molybdenum for 21 years. The total resource of the deposit, 43-101 compliant, is 4.1 million oz of gold and 2.9 billion lb of copper.

“Junior companies with big copper resources would love to have a gold operation to start with,” said Alex Black, president and COO, Rio Alto Mining. “In our case, the initial capex is quite low, about $51 million. Then we will use the cash flow to build the second stage of the project (flotation-concentration), which will cost about $300 million. Still, $300 million is not a lot compared to other projects that require investments in the region of $1 billion to $2 billion.”

While it is true that no new deposits the size of Yanacocha have been found during the last couple of decades, companies continue to harvest the results of the dollars put in exploration. Sulliden Gold, a Canadian company, announced last month the latest figures for its Shahuindo epithermal gold-silver project where it completed 40,000 m of drilling in 2009-10 and plans to drill a further 70,000 m this year. The current resource stands at 1.34 million oz gold and 33.3 million oz silver. The targets for the feasibility study, expected the second quarter of this year, are 150,000 oz gold equivalent annually at a cash cost of $400/oz, for a 10-year mine life. “In terms of infrastructure, it is a very simple project, very efficient,” said Javier Fernández-Concha, general manager, Sulliden in Peru, who believes that after the dispute over the ownership of the deposit, which was solved in early 2009, the locals are highly supportive of the company.

Shopping for CopperWhile high metal prices are encouraging juniors to become mining operators, sizeable copper projects with their high capital expenditures continue to be tricky for small companies. Those talented and lucky enough to find a very good copper asset normally end up finding a buyer that will put it into production.

The Peruvian mining sector has witnessed a number of those transactions in recent months, such as First Quantum’s acquisition of Antares Minerals and its Haquira project for $453 million. Haquira, located in Southern Peru, has measured and indicated resources of 3.7 million mt copper equivalent (measured and indicated) and 2.4 million mt (inferred).

More recently, HudBay Minerals’ has acquired Norsemont Mining and its Constancia copper deposit in a deal valued at $520 million. Constancia is a highly-advanced project with the environmental and social impact assessment already approved and where a feasibility study optimization (FSO) has just been completed. The in-pit reserves have been increased as a result of higher metal prices and the life of the mine has also been expanded to 16 years.

“We are pleased with the results of the FSO. They have provided for an increase in average annual concentrate production by 28%,” said Bob Baxter, president and COO, Norsemont. The operation is expected to process an average of 70,000 mt/d, producing copper and molybdenum concentrates, as well as gold and silver as by-products. Initial capex will be $920 million.

Before the HudBay Minerals offer was made, Norsemont increased its land package to prevent the operation from conflicting with the locals’ interests. “We completed the acquisition of more than 4,000 hectares, which means that approximately 80% of our infrastructure is on our private land. That includes the tailings facility, the plant site and the bulk of our open-pit. The fact the tailings dam sits in our property minimizes the risk of local opposition,” Baxter said.

Another project where a transaction might happen is Candente Copper’s Cañariaco Norte, a porphyry containing 9 billion lb of copper (10.3 billion lb of copper equivalent). According to the latest pre-feasibility data released in January, the project will yield 119,000 mt/y of copper, plus 39,000 oz of gold and 911,000 oz of silver, for 22 years. According to Candente Copper, the project also has very good expansion potential at the Cañariaco Sur and Quebrada Verde areas. The estimated capex to put it into production is $1.4 billion, a figure usually beyond the means of a junior company.

Finally, another copper project worth keeping an eye on is Los Calatos, owned by Metminco of Australia, that had not generated much attention until last year when the company announced resources of 4.7 million mt of copper equivalent (it has significant molybdenum). A 50,000-m diamond drilling program to confirm the resources (most of which are still inferred) and test new targets is currently under way.

Silver OpportunitiesOne junior that has made a 180º shift is Bear Creek Mining. From being a pure exploration company intending to sell its assets, Corani and Santa Ana (with combined reserves and resources of more than 500 million oz of silver, plus 300 million oz of silver equivalent in lead and zinc), Bear Creek has now become a development company with a vision to produce 15 to 20 million oz of silver in Peru by 2014.

“When we saw the size of the assets we had, it was clear we had to build them. We have been bringing in different skills to the company to handle the fact that we are transitioning from an exploration company to a developer of two important mines in Peru,” said Andrew Swarthout, CEO, Bear Creek.

“Santa Ana is the project that is going to emerge more quickly. Our view is to be in production in mid-2012. Corani is probably two years behind because it is a more complicated project that requires more capital and a longer permitting time. We have just started the feasibility study so realistically Corani will not see production before 2014,” said Swarthout.

Capital expenditure for Santa Ana will be $69 million, while Corani will require an investment in the region of $400 million. The company is optimistic it will become one of Peru’s largest silver producers in the medium term: “If we produce between 15 and 20 million oz/y of silver, we will be part of the big list. It is achievable,” said Elsiario Antúnez de Mayolo, vice president of operations, Bear Creek.

Another company in the silver business is Fortuna Silver, who produced 1.9 million oz of silver at its Caylloma unit last year (more than 4 million oz silver equivalent counting the gold, copper, lead and zinc), and expect silver production to boost with the construction of its new San José mine in Mexico.

Jorge Ganoza, president and CEO, Fortuna Silver Mines, emphasizes that Fortuna has had a zero-fatality record since the beginning. “We have been aggressively expanding the throughput at our Peruvian operation, going from 500 mt/d to the current 1,250 mt/d,” Ganoza said. “We have been funding the construction of our second mine in Mexico: we started construction activities in April 2010 and we are set to commission that mine in August 2011. We have consolidated our status as producers with a medium-sized underground operation, and next year we will have two operating assets in the two largest silver producing countries in the world.”

While the Mexican unit will add 5 million oz silver to Fortuna’s portfolio, the company is actively looking for what would be a third operation. According to Ganoza, Mexico and Peru are the places to be. “We are solely focused on Latin America,” Ganoza said. “We have been to countries like Argentina, Chile and Ecuador on several occasions, but we will have to see compelling opportunities for us to establish operations in these countries.”

Exploration FocusPeru is populated by dozens of juniors hoping to replicate previous success stories. The country offers very interesting opportunities in terms of small and medium-sized precious metals production units on which companies could leverage for future growth.

Esperanza Resources, discoverers of the San Luis gold-silver project which is now operated by Silver Standard, will retain a 20% interest if the latter company builds the mine and starts production. The cash flow generated will allow for higher exploration budgets. In addition to Peru, where it has 12 properties (Pucarana and Colqui Orcco being the main areas of focus at the moment), the company has interests in Mexico and Slovakia.

Pinaya, a 20,000 hectare land package, hosts a resource of 666,000 oz of gold and 384 million lb of copper (indicated and inferred). “AM Gold was able to acquire the property between 2004 and 2008,” said Gerald Aberle, president and COO, AM Gold. “I think it would be all but impossible for a junior to assemble a quality land package like Pinaya today given the extraordinary level of mining and exploration activity in the Tintaya belt and the fact that gold and copper prices are now at all-time highs. While AM Gold has invested more than $15 million in Pinaya over the years, less than 2% of the total Pinaya land package has been explored to this point.”

Aberle expects the company to be drilling by the second quarter of this year, in both the resource area and at new targets. “If we continue to build oxide gold resources it will obviously be a different development scenario than we would have with a large copper porphyry system. And, at Pinaya it could very well be both,” Aberle said.

With regard to Estrella Gold, its President Keith Laskowski explained the company’s two-pronged strategy. “Having an asset with a measured resource is the best way to add value to the shareholders, while the grassroots exploration side is the gambling side,” Laskowski said. “Colpayoc (144,600 oz) has the potential to rapidly increase the number of ounces with a small amount of work. We are currently a small company, so if we could add 1 million oz as an asset that would be great for our shareholders.”

Laskowski warns that juniors need to decide very carefully where to spend their money when it comes to grassroots exploration. “Generative work is a double-edge sword,” Laskowski said. “You can waste a lot of money if you do not know what you are doing. On the other hand, you can also be fabulously successful. The trick is to carefully manage it so as to position yourself in a likely spot for a good discovery. I always put the example of Arequipa Gold, who after spending a relatively small amount of money on exploration with limited drilling were able to sell the company to Barrick for hundreds of millions.” Last year Estrella staked out five new gold-silver properties in Peru and hopes to find joint venture partners.

Exploration is the embryo of the industry, and major players frequently join forces with junior companies to promote the generation of new discovery opportunities. Examples of this include Vena Resources, who counts Gold Fields and Cameco, the uranium giant, as its partners; and Solitario Exploration and Royalty, who has strategic alliances with Votorantim of Brazil and Newmont.

“As part of our alliance with Newmont, by which they now own about 9% of Solitario, we have two projects of interest: La Promesa and Cerro Azul, both in Central Peru,” said Christopher Herald, CEO, Solitario. “La Promesa is a silver-lead-zinc-indium deposit with very high grades at surface, of well above 1,000 grams of silver per mt. Cerro Azul is a gold-silver-base metals project, also consisting of veins and good grades at surface. We own 100% of both projects right now, but after we drill 4,000 m, Newmont can earn-in 75% by taking them through the construction.”

Some exploration companies specializing in generative work have a strategy to look for joint venture partners in properties they see as promising. “The way we operate is to share the risk. We spend the first money, which is the creative money, to bring projects to the drilling phase. Drilling is not rocket science, but defining the targets for the drill-holes requires creativity,” said André Gauthier, president, Lara Exploration, a junior with properties in Peru, Chile, Brazil and China.

In Peru, the company already has joint ventures for its Lara (copper) and Corina (gold), as well as a portfolio of five other gold/copper projects open for earn-in agreements. Sharing risk in the mining business makes sense, assures Gauthier. “The exploration projects that statistically will become mines are just one in a 1,000,” Gauthier said. “This shows the high risk associated to mining exploration. As a company, we want to add value to our shareholders by making discoveries, not by playing with shares.”

Joseph Grosso, president and CEO, Golden Alliance Resources, agrees. “Mining exploration is fuelled financially by risk capital, especially at the very early stages,” Grosso said. “The statistics of how many early-exploration ventures go on to become a project show that exploration is a risky business. The average is not good at all.”

Golden Alliance, a spinoff from Golden Arrow, now stands as the Grosso Group’s Peru-focused exploration company. Its main projects are Cocha, a copper-silver-gold property where a new drilling campaign started late last year, and the Río Tabaconas gold project.

The Grosso Group, present in Peru since 1995, continues to see many opportunities in the country. “Peru still has tremendous potential, maintained partly by its challenging geography and difficult access,” said David Terry, vice president of exploration, Golden Alliance Resources. “It takes time and lots of perseverance. There is still so much to be learned.”

Peru’s Pros and ConsEnough has been said about Peru’s geological potential, but how about the practical aspects? Things like, the availability of geological information, the administrative procedures, the permits and even the access to funds locally?

“We have one of the best concession systems in the world, similar to the one used in Canada. We actually use Canadian technology. The system works online and it is always up-to-date. In Chile, they have a judicial system managed by lawyers, which is not ideal because you pay less for the property itself but the administration costs are much higher. In Peru, it is $3 per hectare,” said Miguel Cardozo of AEPE and Alturas Minerals.

“The framework is fairly good,” said Owen Miller, exploration manager, Sienna Gold. “The level of geological information with digital access is very good. The land is priced at a reasonable level. 10 years ago it was too cheap so companies sat on millions of hectares. Now people have to turn over land. Peru is better than Chile.”

“The information on properties is excellent, transparent to the maximum,” said Stevens Zuker, senior vice president, Esperanza Resources. “In Mexico, it is much more difficult to find who owns the mineral rights and what has happened in the past in that property.”

On the negative side, exploration managers complain the permitting processes are increasingly tiresome. While companies understand environmental protection needs to be at the core of responsible mining activities, some believe the requirements are too stringent. “Today it takes more time to obtain a drilling permit than it did 15 years ago, and this contributes to a slower rate of progress. We would like to drill four to five projects a year, but the permitting process is slowing us down,” said Keith Laskowski of Estrella Gold.

Esperanza Resources faces the same issue. “Getting the permits is becoming increasingly complex and this is delaying our progress,” said Julio Mendoza, exploration manager, Esperanza Resources.

Developing the Stock MarketsWith regard to access to funding, Peru is providing pleasant surprises for junior companies. The Lima Stock Exchange (BVL) is the only one in South America that has a junior segment, similar to those in Toronto or London. A number of companies, such as Vena, Bear Creek, Zincore, Rio Alto, Minera IRL and Candente, among others, have already seen the advantage of listing locally. Putting together the juniors and the producers in BVL’s main board, mining represents 60% of the total market capitalization, which makes Lima a mining exchange and a potential regional hub for mining companies from abroad. Last year Amerigo Resources, a Canadian company with assets in Chile, also listed in Peru.

André Gauthier of Lara Exploration, one of the promoters of the creation of BVL Venture Exchange, insists it made sense to be in Lima for this type of enterprise. “In order to make a stock exchange run well you need money, but you need the people too: lawyers, investor relations managers, geologists that can act as qualified persons, qualified laboratories etc. Compared to other Latin American countries like Chile, where Big Mining controls 60% to 70% of the land; or Brazil, where there is not a tradition of publicly traded mining companies, Peru appeared as an advantaged location. Listing a company in Canada costs anywhere between $400,000 and $800,000 a year. The same thing in Lima costs you $150,000 per year.”

“To have an exchange here supporting us is very important,” said Courtney Chamberlain, executive chairman and CEO, Minera IRL. “One third of our equity and 80% of our shareholders are Peruvian. Liquidity has happened in Lima and we will never walk away of this stock exchange.”

The integration of the Lima exchange with those of Santiago and Bogotá is set to create further opportunities regionally. Alberto Arispe, general manager of Kallpa Securities, a brokerage house, announced that his firm is forming alliances with Chilean and Colombian brokers to trade Peruvian stocks in these markets.

“The merger with Santiago and Bogotá stock exchanges will bring lots of new products into the three markets and there will be more liquidity. Integration is going to be very positive,” said Diego Benavides, president of Minera IRL’s Peruvian subsidiary.